Why RLAM has changed tack on European equity

Royal London Asset Management has announced it is doubling the risk on its newly realigned European Opportunities fund.

Formerly focused on income, the fund is now taking a more high-conviction, growth-oriented approach.

The firm’s £290m European Income fund has been renamed the Royal London European Opportunities fund and its portfolio has been cut and realigned.

In four tranches of trading over almost two weeks in June, the fund was tightened to just 38 names, down from 52.

Neil Wilkinson, formerly sole manager of the £658m Royal London European Growth fund, has taken the lead manager spot on the opportunities fund while remaining deputy on the growth fund.

He says: “Effectively half the portfolio was sold and seven to eight stocks were added to get back to that 38 number.”

Stock selection for the funds will remain the same, only the portfolio construction has changed, he says.

“It will be more aggressive in the names and positions it takes.” To achieve the outperformance necessary to make top quartile, the opportunities fund will need to double its risk level, he says.

A high conviction fund with a large tracking error is important in the bifurcated age of cheap trackers and demand for more active management, he says.

The outperformance needed for European Equity funds to be top quartile over the past couple of years has been between 2.8 and 4 per cent above benchmark in te last few years, higher than usual.

Year to date, that necessary outperformance has been just 1.1 per cent.

According to their research, to generate 200bps of outperformance the fund would need to run a tracking error of 4 per cent, as the fund targets alpha of 0.5.

Andrea Williams will be lead manager of the growth fund and deputy on the opportunities fund, which she used to run as an income strategy.

Wilkinson says the European team has moved away from income investing because investors want UK and global income only.

The opportunities fund contains the “best ideas” of the growth fund, however the portfolios will begin to differ over time as the opportunities fund will be biased to small and mid-cap companies; the growth toward large-cap.